Seeking Alpha
, Think Finance (850 clicks)
Long/short equity, arbitrage, event-driven, research analyst
Profile| Send Message|
( followers)  

The shale boom has had many consequences, some of the most visible being the natural gas crash due to oversupply, as well as the associated coal crash due to dispatch switching from coal to natural gas in electricity generation. Dispatch switching happens when natural gas becomes the cheaper fuel to run, and instead of scheduling a coal-fired generator to run and provide electricity, a natural gas turbine is scheduled first on economic grounds. It has led to 30%+ increases in demand for natural gas by the power generation sector, while leading to greater than 15% drops in coal usage.

There are also other less obvious consequences which have been happening or might still lurk in the future. This article is about two of them, still only as ideas to be explored further. Here they go:

The shale revolution might lead to less offshore exploration and drilling

Drilling for shale was supposed to be quite expensive, with the fracking steps adding significant cost. Still, with the high initial production these wells might end up being competitive with much more expensive enterprises such as deep offshore drilling. In fact, this effect might already have expressed itself, as offshore rigs have been on a downtrend that got even steeper after 2005, as the shale boom took place (see chart below, source: EIA):

(click to enlarge)

This trend was also made worse by BP's (NYSE:BP) disaster with the Horizon well in the Gulf. But still there seems to be a clearly significant trend towards less offshore rigs, even if within these maybe capacity is shifting towards deep water operations. Some of the rig operators that are more focused on offshore drilling - Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO), Noble Corp (NYSE:NE) or Ocean Rig (NASDAQ:ORIG) - are thus exposed to this ongoing negative trend,

The shale bust during 2013 might mean difficulty for utility-like pipeline operators

With the rigs drilling for natural gas having been on a downtrend for several months now (more heavily since October 2011), the natural production decline of the existing wells is about to take over. This decline rate is pretty aggressive for shale wells, with production dropping 60-90% in the first year. And for the aggregate production, it's estimated that up to 32% of the entire production would disappear, if no drilling took place during an entire year (that's around 22 Bcf per day) (source: EIA).

(click to enlarge)

What this all means is that the lower drilling activity for natural gas is going to result in somewhat lower natural gas production during the tail end of 2012, and considerably lower production (up to 10% less) during 2013. Now, the pipeline operators don't much care what natural gas costs, and have been benefiting from higher volumes during the last two years. But they will have to care about lower volumes during 2013. In some industries, a contraction in volume can also lead to a contraction in prices, making for much lower revenues (because of the added effect of lower volume on lower prices). Pipeline operators might skirt the price effect due to contracts, but certainly won't avoid the volume effect.

Pipeline operators such as Williams Companies (NYSE:WMB), Spectra Energy (NYSE:SE), Energy Transfer Partners (NYSE:ETP), El Paso Pipeline Partners (NYSE:EPB), Boardwalk Pipeline Partners (NYSE:BWP) and others are usually seen as utility-like, stable, businesses. These are businesses usually also having interesting dividend yields. This entirely unexpected drop in activity might thus provoke quite a surprise. More pipeline operators can be found here (there are too many to mention, I tried listing some of the largest that are more focused on natural gas).

While expecting this development is not enough to warrant shorting or perhaps even selling this kind of stock, it still constitutes an important warning that maybe this stable sector will see some significant waves within the next year.

Conclusion

Both the shale boom and bust can have wide-ranging, sometimes unexpected, consequences. This article presented two such instances, one already ongoing - the much lower offshore rig count, the other expected for 2013, which will be the lower natural gas volumes from today's lowered drilling activity, with an impact on the pipelines transporting that natural gas.

Source: 2 Other Possible Consequences Of The Shale Boom And Bust